The 2008 presidential campaign is loaded with tax rhetoric. The GOP says that the Bush tax cuts have worked and it would be crazy to raise taxes during an economic slowdown.
The Dems say that the Bush tax plan “gave tax breaks to the rich, who didn’t even want them” — as evidenced by Warren Buffet repeatedly saying that he pays less taxes than his secretary — and that uber-earning people — e,g, greedy CEOs and hedge fund managers — aren’t paying their fair share.
What do the numbers say?
Well, several pivotal conclusions can be drawn from a comparison of published IRS data for 2000 (the year immediately prior to the first wave of so-called “Bush Tax Cuts for the Wealthy”) to the data from 2005 (the last year of IRS data available):
1. The effective tax rate for the top 1% of tax filers — those reporting AGI greater than $365,000 — did go down 4.32 percentage points from 27.45% in 2000 to 23.13% in 2005 — a 16% reduction; the effective tax rate for the top 5% earners (which, of course, includes the top 1%) went down 3.64 percentage points from 24.42% in 2000 to 20.78% in 2005 — a 15% reduction.
Note: “effective rate” is actual income taxes paid divided by income; “marginal rate” is the percentage of “last dollars earned” paid in taxes. So-called “payroll taxes” for Social Security and Medicare are not included (see ana;ytical note below).
2. But — and it’s a big “but” — the effective tax rate for the bottom 50% of all tax filers (those reporting less than $28,875) also went down — from 4.62% in 2000 to 2.98% in 2005 — “only” 1.62 percentage points, but representing a whopping 36% cut from the 2000 rate.
Note: 32% of tax filers paid zero income taxes or received refundable credit checks from the government
3. And, the amount of taxes paid by the top 1% as a group was approximately the same in 2000 ($388.9 billion) and 2005 ($368.1 billion); ditto for the top 5% — $553.7 billion in 2000 and $557.8 billion in 2005.
4. During the same time period, the tax proceeds from the bottom 50% of tax filers dropped almost 25% — from $38.3 billion in 2000 to $28.7 billion in 2005.
5. So, the tax burden absorbed by the top 1% increased by 2 percentage points from 37.4% of total income taxes paid in 2000 to 39.4% of total income taxes paid in 2005; the top 5% share of the tax burden increased by 3.2 percentage points from 56.5% of toal income taxes in 2000 to 59.7% in 2005; the bottom half’s share of total income taxes paid dropped from 3.9% in 2000 to 3.1% in 2005.
6. Taking a longer run view, the share of the income tax burden shouldered by the top 1% has roughly doubled over the past 25 years — from about 20% of total income taxes paid to about 40% of all income taxes paid; the share of the income tax burden shouldered by the top 5% has has increased roughly 25 percentage points over the past 25 years — from about 35% of total income taxes paid to about 60% of all income taxes paid.
7. The share of income taxes borne by the bottom half of tax filers has fallen from over 7% to about 3%.
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Observations
I. The picture is certainly different when the focus shifts off marginal tax rates to the amount of taxes paid or the share of the total income tax burden.
2. Broad based surveys indicate that people in general think the maximum percentage of a person’s income that SHOULD go to state, federal, and local taxes (in total) is 16%, with only 12% of respondents saying that the rate should be over 30%.
From a HarrisInterActive Poll:
Q 650: What is the maximum percentage of a person’s income that SHOULD go to taxes – that is, all taxes, state, federal, and local?
http://www.taxfoundation.org/files/topline-20050414.pdf
3. A tax burden of 60% of taxes paid by 5% strikes me as a pretty high number — especially since it’s 5% of tax filers not 5% of citizen-voters. Of course, “fair share” is in the eye of the beholder …
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Data deck: 02-irs-tax-quartiles-key-metrics
Primary data source: http://www.taxfoundation.org/news/show/250.html
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Analytical Note: This post, and a few follow-ons that I have in process, focus on individual federal income taxes. That distinction excludes corporate taxes (an entirely different animal), state taxes (a crazy quilt of different programs), and so-called “FICA” or “payroll taxes” (for Social Security and Medicare). The latter exclusion is admittedly dicey. Employees’ paycheck deductions for Social Security and Medicare are a constant percentage of income (6.2% + 1.45% = 7.65%), up to $102,000 in earnings. So, many people argue that the assessments are “regressive.” Nonetheless, I consider these charges to be more akin to forced savings or deferred income plans since contributions are matched by employers and since the benefits received (e.g. retirement income and health insurance) are directly tied to the level of contributions. So, I choose to outboard them from “tax and spend” analyses.
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Next up: More on income, deductions, credits, and taxes.
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